Ibovespa fell below 100,000 threshold; Brazilian real diverged from peers and lost ground against dollar
03/24/2023
By adopting a very hawkish stance on monetary policy, the Central Bank triggered a sharp correction in domestic financial assets during Thursday’s session. Interest rate futures rose sharply from the first minutes of the day, in response to indications that the Selic key interest rate is unlikely to be lowered in the near future. Government reactions to the decision by the Monetary Policy Committee (Copom) were numerous throughout the day, creating additional turmoil and hitting Brazilian assets, which reacted negatively. The Ibovespa, Brazil’s benchmark stock index, fell to its lowest level since July and moved away from the 100,000-point threshold, while the exchange rate diverged from its peers, making Brazilian real lose ground against the U.S. dollar.
The behavior of financial assets the day after the Copom meeting caught the attention of investors. The rise in future interest rates was already on the cards after the monetary authority maintained harsh signals regarding the next steps of monetary policy. The market’s optimism regarding the possibility of bringing forward the Selic’s easing cycle, which had been gaining strength in recent weeks, gave way to a rate adjustment in Thursday’s session. The interbank deposit (DI) rate for January 2024 rose to 13.17% from 13.005%.
The deterioration in risk perception had a direct impact on the dynamics of other Brazilian assets. The foreign exchange rate started the day lower, while the Ibovespa rose. Throughout the morning, however, the sense of risk among financial agents worsened, as criticism of the Central Bank by members of the government and the maintenance of interest rates at 13.75% per year raised concerns among agents.
Market participants paid particular attention to President Luiz Inácio Lula da Silva’s statements. He said in the early afternoon that “history will judge” the decision of the Copom, and reiterated that the Senate is “the one that has to take care of” Central Bank President Roberto Campos Neto. In Mr. Lula’s view, Mr. Campos Neto must take care of monetary policy, employment, inflation and income, “and he is not doing this.”
“The position of the Central Bank, which is correct, will raise the temperature and this increases the probability that the PT [Workers’ Party] will make an effort to try to remove Roberto Campos Neto from the command of the Central Bank. It’s more institutional turmoil and the market is pricing that in through a higher risk premium,” said the partner of a large asset management company on condition of anonymity. “The market sees a chance that the clash between the Central Bank and the federal government will lead to institutional deterioration, and that’s what caused the deterioration of the currency and the stock market. The government making its own homework more difficult.”
As a result, the Ibovespa did not follow the good performance of Wall Street and faced heavy losses in the session. The index ended Thursday’s session down 2.29%, at 97,926 points, the lowest level since July 18, 2022. The foreign exchange rate ended Thursday at R$5.2884 to the dollar, up 1% in the spot market.
“The market is not functioning according to economic logic, and this has a lot to do with the turmoil, given the delay in presenting the new fiscal rules and the discussions between the government and the Central Bank. The criticism of the monetary authority is not helping, and when you add to that the uncertainty about what will happen with the fiscal framework, the result is an increase in the perception of Brazil risk,” said Joaquim Kokudai, chief investment officer at Somma Investimentos/JPP Capital.
In this sense, despite the Central Bank’s indications that the monetary policy stance will remain restrictive, the market has priced in even higher inflation in the long term. The breakeven inflation rate extracted from the NTN-B (National Treasury note) with maturity in August 2060 rose to 6.78% from 6.643% in Thursday’s session, according to data from Anbima, the association of securities firms.
The chief economist of BGC Liquidez, Juliano Ferreira, is also concerned about the possible escalation of institutional risks given the government’s pressure on the monetary authority. For him, the perception by the government that it is not taken into account in the conduct of monetary policy can revive the debate on the level of inflation targets and provoke changes in the nomination of directors of the Central Bank.
“If the autonomy of the Central Bank is at risk, if the debate on inflation targets returns and if other directors are appointed, is it worth it? It is a difficult discussion. From a monetary policy standpoint, the Copom is right for what it has done, it’s just that the context is a bit bigger and this generates a debate in the market,” Mr. Ferreira said.
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Luis Otávio Leal — Foto: Divulgação
The chief economist of Banco Alfa, Luis Otávio Leal, believes that the pessimistic movement of domestic assets is in fact the result of a sense of institutional crisis that has been knocking at the country’s door. “If you look only at the Copom decision, the real should have appreciated today [Thursday] and even benefited from it at the beginning of the session, but the noises about an impeachment of Campos Neto and inflation targets got in the way.”
“It was clear that the temperature of the turbulent relationship between the government and the Central Bank has risen,” Mr. Leal said. “The government is limited in its ability to interfere with the Central Bank’s independence, not least because several lawmakers have come out in defense of the monetary authority, but it can choose people for the board of directors who will be a counterpoint to Campos Neto.”
Although the markets as a whole reacted negatively to the perception of a worsening political environment, the stock market concentrated investors’ attention especially in the afternoon, when it fell below 97,000 points. Among banks, Itaú preferred shares fell 2.49% and Bradesco preferred shares fell 3.46%.
Stocks linked to consumption and the domestic economy also stood out negatively – Petz lost 7.59%, Magazine Luiza fell 13.37% and Via declined 7.04%.
“When we talk about the Selic being able to stay at this level for longer than expected, the stock market is one of the first classes to suffer,” said Maurício Valadares, chief investment officer at Nau Capital. “We don’t like the stock market. We admit it is cheap, but it is likely to stay cheap for quite some time, both from a local and an external standpoint,” he said. However, Brazilian stocks are at such a low level that the executive does not see the benefit of shorting the stock market.
“I think that for now, the search will be for political solutions, such as a change in the inflation target,” Mr. Valadares said. He even sees a good chance that the target for 2024 will soon be raised to 4%.
In addition to internal issues, external events have also weighed on Brazilian assets. For Christian Walter, an equity manager at Opportunity Total, the softer statements of the U.S. Federal Reserve Chair Jerome Powell on Wednesday caused the withdrawal of funds from the Brazilian stock exchange towards U.S. assets.
“Previously, investors took refuge in emerging market assets and Brazil did well. In recent weeks, this entry has lost steam,” Mr. Walter said.
*Por Victor Rezende, Augusto Decker, Gabriel Roca, Arthur Cagliari — São Paulo
Source: Valor International